Litigation funding looks likely to grow in popularity, as law firms embrace the opportunity to mitigate costs and manage risks. However, some companies may struggle to scale their resources and ensure profitability. Legal outsourcing could be the solution to these problems.

What is litigation funding?

Litigation funding or champerty is where a party with no direct interest in a litigation case finances it, with the view to share in the award if it proves successful.

While currently illegal in Ireland, it is big business in other jurisdictions where litigation can sometimes be viewed as an investment opportunity. If a potential litigant lacks the resources to bring or defend a case, an external third party investor can intervene in return for a share in the proceeds.

Irish courts uphold prohibition on litigation funding

Neither the Irish courts nor the Oireachtas have gone so far as to commercialise litigation. Due to the current rules on maintenance and champerty, investing in or funding litigation is not only a tort in Ireland, but it is also a criminal offence.

There have been several recent cases in which the continued existence of maintenance and champerty has been challenged. However, despite the approach taken by the courts in other jurisdictions, the Irish courts have steadfastly retained the status quo and declined to permit litigation funding arrangements in Ireland.

The first case to deal with and reject litigation funding agreements in Ireland was Persona Digital Telephony Ltd and Sigma Wireless Networks Ltd v The Minister for Public Enterprise & Ors [2016] IEHC 187.

It was determined that for any party to be permissibly involved in a set of legal proceedings, they must possess a legitimate interest. When a third party funds litigation, and at the same time possesses a legitimate interest in the proceedings, it therefore does not constitute maintenance or champerty. However, when a third party has no interest in a matter other than furthering their own financial interests, it contradicts these rules.

Why is litigation funding still prohibited in Ireland?

The continued prohibition of maintenance, and champerty in particular, is due to it offending public policy due to dangers associated with permitting a third party to fund litigation. It is thought that this could give rise to an abuse of process and meddling.

Equally, litigation funding necessarily involves a loss of autonomy. When a litigant enters into a funding arrangement, they relinquish a degree of control. A case is no longer pursued to vindicate a litigant’s rights, but to ensure the funder makes a return on their investment.

On the other hand, proponents of litigation funding maintain that such agreements facilitate access to the courts, as litigants who may not otherwise have had the means to pursue a claim can now have their day in court.

The matter was appealed to the Supreme Court, but as it stands, champerty remains illegal in Ireland, and the decision in Persona would suggest that the Irish Courts have no intention of relaxing their view.

Other jurisdictional approaches to litigation funding

What makes the Irish position more unusual is that many other common law jurisdictions around the world permit litigation funding.

In the UK, not only is litigation funding legal, it is also a thriving industry. Many parties to disputes from Russia and the Middle East are attracted to the UK courts due to their experience in dealing with high value cross border arbitration disputes, and their reputation for impartiality. The same applies to litigation funding in the US. In contrast, Australia has focused more on domestic claims.

Jurisdictions such as Singapore and Hong Kong, which were traditionally adverse to litigation funding, are now viewed as potential growth markets, particularly in the international arbitration space.

How legal outsourcing can help

Litigation can be a costly and risky pursuit, especially for SMEs or smaller law firms. These businesses may have reservations regarding the recovery of costs from clients if a claim or defence is unsuccessful.

Litigation funding companies take 30% or three times the amount they invest in the litigation – whichever figure is greater. This high return reflects the risky nature of the venture.

The market for litigation funding is likely to increase over the coming years, as companies and law firms embrace it as a viable option to mitigate costs in taking and defending claims. However, many smaller specialist law firms will have difficulties in scaling to meet the resource demands that large scale litigation requires.

By engaging alternative legal service providers such as Johnson Hana, these firms can scale easily at short notice thanks to legal outsourcing. In a similar vein, investment fund houses that are financing litigation can also use a legal outsourcing partner to reduce their costs.